1. Basic present value calculations

Calculate the present value of the following cash flows, rounding to the nearest dollar:

a. A single cash inflow of $12,000 in five years, discounted at a 12% rate of return.

b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.

c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a 10% rate of return.

d. An annual receipt of $8,000 for three years followed by a single receipt of $10,000 at the end of Year 4. The company has a 16% rate of return.

2. Cash flow calculations and net present value

On January 2, 19X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends

of $2.60 per share in 19X1 and 19X2; the dividend was raised to $3.10 per share in 19X3. On December 31, 19X3, Greene sold his

holdings and generated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return on investments.

a. Prepare a chronological list of the investment’s cash flows. Note: Greene is entitled to the 19X3 dividend.

b. Compute the investment’s net present value, rounding calculations to the nearest dollar.

c. Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain.

3. Straightforward net present value and internal rate of return

The City of Bedford is studying a 600-acre site on Route 356 for a new landfill. The startup cost has been calculated as follows:

Purchase cost: $450 per acre

Site preparation: $175,000

The site can be used for 20 years before it reaches capacity. Bedford, which shares a facility in Bath Township with other municipalities, estimates that the new location will save $40,000 in annual operating costs.

a. Should the landfill be acquired if Bedford desires an 8% return on its investment? Use the net-present-value method to determine your answer.

b. Compute the internal rate of return on this project.

4. Straightforward net-present-value and payback computations

STL Entertainment is considering the acquisition of a sight-seeing boat for summer tours along the Mississippi River. The following information is available:

Cost of boat $500,000

Service life 10 summer seasons

Disposal value at the end of 10 seasons $100,000

Capacity per trip 300 passengers

Fixed operating costs per season (including straight-line depreciation) $160,000

Variable operating costs per trip $1,000

Ticket price $5 per passenger

All operating costs, except depreciation, require cash outlays. On the basis of similar operations in other parts of the country, management anticipates that each trip will be sold out and that 120,000 passengers will be carried each season. Ignore income taxes.

Instructions:

By using the net-present-value method, determine whether STL Entertainment should acquire the boat. Assume a 14% desired return on all investments,- round calculations to the nearest dollar.